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5 mutual fund myths debunked
Personalfn.com | May 07, 2008 11:09 IST
All diversified equity funds are 'diversified'
More often than not, equity funds have a bias for a particular segment like large caps or mid caps. Also, diversified equity funds are known to take sectoral bets i.e. hold a significant portion of their portfolios across a few sectors. To further complicate matters, even the investment objective and/or the Offer Document may not reveal the fund's investment biases.
The learning: In the mutual funds segment, not everything is what it seems. Don't take the nomenclature i.e. 'diversified' at face value while getting invested. Instead study the fund's portfolio over a period of time and across market cycles to better understand its true investment style. Also the sales and promotional literature issued by the fund house can provide insights into a fund's investment proposition.
Funds that regularly declare dividends make good buys
Dividends are declared by a fund house subject to availability of a distributable surplus and at the latter's discretion. Hence, it is typically assumed that the dividends are indicators of the fund's strong performance; this need not always be true.
For instance, there is a possibility that the fund manager has run out of investment opportunities, so he has chosen to distribute the available surplus among investors rather than invest it. Or even worse, the fund might have sold some of its best stocks rather prematurely to generate cash for the dividends, since the larger motive was to attract investors by declaring dividends.
The learning: We aren't suggesting that there is an ulterior motive behind every dividend declared. However, a fund's dividend history is certainly not a factor to base an investment decision on. Instead, you must consider the fund's investment proposition and performance across the risk and return parameters over longer time frames, and its suitability in your portfolio, among a host of other factors before making an investment decision.
An FMP's performance can never turn negative
Now the key is that the investor stays invested until the FMP's maturity; by doing so he will be on course to receive the proposed return. However, in the interim period, factors like a change in the interest rate scenario or rising inflation could push the FMP's performance into negative territory.
The learning: Don't push the panic buttons if your FMP investment turns negative in the interim; it is structured to deliver the indicative return on maturity. The operative words being 'on maturity' and not in the intermittent period. So long as the FMP's portfolio is dominated by instruments of the AAA/equivalent variety (thereby eliminating any credit risk) and you stay invested for the entire tenure, you can afford to be indifferent to a negative performance in the interim.
SIPs always score over lump sum investing
However, an SIP may fail to lower the average purchase cost should the markets rise in a secular manner over the SIP's tenure. Such a scenario cannot be ruled out over shorter time frames. In effect, a lump sum investment could prove to be more cost-effective vis-�-vis an SIP investment in a rising market scenario.
The learning: For an SIP to be successful (as opposed to a lump sum investment), having a long-term investment tenure is pertinent. Hence, while investing via the SIP mode, opt for a tenure of at least 12-24 months.
A lower NAV makes a cheaper buy
In stocks, the book value and the market value can be distinct from one another, leading to a cheap or expensive buy. However, in mutual funds, the NAV represents the asset value backing each unit i.e. the intrinsic worth of each unit. As a result, the concept of a lower NAV making a cheaper buy vis-�-vis a higher NAV is fundamentally flawed. Sadly, fund houses and investment advisors have over the years milked this myth to the hilt in order to sell NFOs to gullible investors.
The learning: Don't let a fund's NAV influence your investment decision. Instead, evaluate the fund on parameters like its track record, investment processes followed by its fund house and suitability for you, among others.Your family's future depends on this. Read now
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